Overdue

I was discussing the subject of retirement the other day with a friend. We decided we weren’t sure when that would happen, we weren’t even positive that it would happen—and we really didn’t know what “it” would be like if and when it did happen. Finally—it had been a pretty hectic week, after all—I somewhat playfully suggested that the best definition of retirement would be the absence of time-critical deadlines. Ah, now that’s something to look forward to!

Retirement has its own pressures. But the “difficulty” that my friend and I had actually describing what we would “do” is a real problem in retirement planning. If you don’t know what you are saving for, after all, it’s difficult to be very effective in your planning. The things we are accustomed to saving for—a car, a house, the kids’ college tuition, a vacation trip—generally are not only things we can envision, they have a very specific price tag.

Now, I know you’re thinking that retirement—more precisely, living in retirement—also has a price tag, and anyone who has an interest in knowing what that is can turn to any number of readily available calculators capable of revealing that number. Unfortunately, those disembodied numbers don’t shed much light on defining what we’ll get for our money—and they tend to be so large that the normal reaction is, “Isn’t there a cheaper model?”

I’ve seen a lot of interesting—and very creative—attempts to help overcome these obstacles, and I’ve no doubt that they have done a good job helping many participants prepare for a better retirement (whatever that may be).

To me, however, the answer to what retirement savings is for starts with a budget. And no, not what you’ll need in retirement, but what you spend money on today. The simple reason is this: A participant who doesn’t do an annual budget—even if it’s on the back of an envelope—while he or she is working doesn’t have a chance, IMHO, of beginning to understand the concept of retirement planning, much less savings.

Once you have that list of what you spend money on today, you’re well on your way to explaining what you’ll spend money on in retirement. Oh sure, some things you’ll spend more on—and others less; there are things you don’t have to buy now that you will then, and some things, like the care and feeding of your children, that you at least hope have a time limit. But I think that annual budget list answers questions about retirement in a way that no beach-umbrella-embossed retirement savings brochure ever can.

Budgets, of course, are composed of two basic elements: income and expenses. And just as surely as the latter deals with the “what am I doing this for” motivation, I have found that filling in the gaps on the income side very effectively deals with the realities of needing to put enough money aside. Not that those answers are generally “easy,” of course, but all of a sudden, retirement savings is transformed from looking like “extra” money to live, to what it actually is—replacing income sources that will not continue after retirement.

Finally, having waited far too long to be willing to tell participants the truth, many now have, IMHO, gone too far the other way—insisting that we either tell participants the total amount they need to have saved at retirement, or at least some percentage representation of how close they are to attaining that total amount. Those numbers are too big to be meaningful, and the accompanying percentages generally too small to provide the encouragement participants need to stay with it.

Unfortunately, we have tended to continue to treat retirement savings as discretionary savings. Personally, I think we’d do a better job of paying that retirement bill if participants set an annual budget for retirement planning just like we have for the mortgage or the car payment. That would give them a shorter-term target that could still be part of the larger goal.

Too often, retirement savings is a function of what is left over after everything else is paid. And that means that, too often, particularly when things like health care and filling the tank cost more than we had planned, we not only don’t pay that “bill,” we don’t even see it as overdue.

- Nevin E. Adams, JD

The Sum of Its Parts

Last week, the House Committee on Education and Labor passed the 401(k) Fair Disclosure for Retirement Security Act (H.R. 3185). That it passed was no surprise (it did so along party lines, and it is, after all, a bill sponsored by the chairman of that committee, Congressman George Miller (D-California)).

The issue that seems to loom largest in the minds of those paying attention is the requirement that all service providers break down their charges into four specific categories: administrative fees, investment management fees, transaction fees, and other fees. This isn’t a big deal for many, perhaps most—and it’s a lot simpler than the first version of the bill. Still, a number of bundled providers are claiming that it will be a burden for them to determine what that breakdown is, that the process of discovering—and communicating—those figures will cost money, and, at some point, that it doesn’t make sense because those services aren’t available from them at an à la carte pricing.

A stronger case can perhaps be made that these disclosures will amount to naught; that participants won’t read or understand them—or have any frame of reference. Plan sponsors are concerned that the disclosure will simply generate more participant concern and/or confusion, and potentially provide some with an excuse to defer or forego participating in the plan, and I think there are merits in all these concerns. Still, it seems unlikely that the Miller bill will go anywhere, certainly not in the short-term (it’s an election year, after all)—and the Department of Labor is well into the process of setting out its own proposals on enhanced fee disclosures.

Adults Education

But I think—and I’ve said this before—that it’s time we started treating participants like adults. We need to tell them the truth about retirement expenses, we need to be blunt about the realities of their current savings patterns, and they need to understand that these services we work so hard to provide have a cost. And, IMHO, the advent and widespread embrace of “automatic” plan features makes that honesty more critical than ever.

In that spirit, and regardless of what we wind up with on the regulatory or legislative front—or when—I think it’s time we insist on the following:

• Every plan sponsor should receive—today—a detail of the fees paid by their plan—and, IMHO, the breakdown articulated in the Miller bill is a good framework. Bundled providers can surely provide estimates, if nothing else. You can’t fulfill your fiduciary duty to ensure that fees and services are reasonable if you don’t know what the fees for those services are.

• Every plan sponsor should receive some idea of the fees paid by participants in their plan. You don’t have to see the Miller bill as inevitable to know the day is coming when we’re going to HAVE to tell participants what they are paying in a more explicit way. Worst case—take the detail above and divide it by the number of participants; or take the total plan fees, divide it by the total plan market value, and multiply it by the individual account balances. You might be surprised how close that will get you (certainly if the fees are largely asset-based).

"Compare" Ability?

Now, assuming that their plan adviser has—or will take —a leadership role in attaining those two results, I think it’s time to give plan sponsors and, eventually, plan participants one more thing: something with which to compare that result.

Other, comparable 401(k) plans would be good—but why limit it? Why not compare it with the account fees, transaction charges, and retail share-class charges participants would pay if they truly did it on their own?

Many have been worried that participants would be put off by knowing how much these programs really cost—some in Congress clearly think participants are getting ripped off.

It may be naïve, but I still think most are getting a real bargain—they just don’t know how good they have it.

- Nevin E. Adams, JD

"Better" Pill?

I hate going to the doctor for a checkup.

Or the dentist, for that matter. I don’t even like to take my car in for “scheduled maintenance.”

Granted, for the most part, it’s no big deal—just a minor inconvenience of time, setting aside that gentle comment from the doctor about how I need to lose some weight, to get some more exercise. Or that somewhat incredulous tone from the dental hygienist as she says, “How long HAS it been since you flossed?”

Still, I hate going and will put it off just as long as humanly possible—not because the process itself is particularly painful or arduous, but because I am always nervous that there will come a time when they will find something that requires a more significant change in my lifestyle.

There is, of course, the chance that they might find something at a stage that allows for plenty of time for treatment—and I know that those regular checkups provide the best opportunity to head off something truly calamitous. I know this—rationally—but sometimes it just seems “better” not to know.

I’m sure that same kind of thinking holds sway in many participants’ minds when it comes to retirement savings projections.

"Lack" Luster?

Last week, the Employee Benefit Research Institute (EBRI) published its 18th annual Retirement Confidence Survey (RCS)—or, as I’m beginning to think of it, the annual lack of retirement confidence survey. Not surprisingly, the survey tracked the biggest one-year drop in confidence in its 18-year history (see “Retirement Confidence Plummets in EBRI Survey”)—to a level where less than one in five (18%) was “very confident” about having enough money for a secure retirement. What wasn’t so widely reported was that that 18% matched the levels in 1993, though it has fluctuated over the intervening years (retirees in 2008 were actually more confident than were 1993 retirees).

The RCS is based on phone interviews with participants and retirees, not an objective evaluation of their incomes and actual savings accounts, and it’s hard not to wonder how many are confident when they have no reason to be, IMHO. For, while only 18% were very confident, nearly half (43%) were somewhat confident, a number unchanged from last year’s RCS (see “Workers’ Confidence in Traditional Benefits Slip”). All told, then, well over half—in fact, nearly two-thirds—of respondents expressed some level of confidence in having enough money to live, and live comfortably, throughout their retirement years.

Unfortunately, there is little in the RCS data to suggest that this confidence is grounded in anything other than wide-eyed optimism, a willing suspension of disbelief, or good old-fashioned ignorance. About half of the workers surveyed by the RCS (among those that provided this information) said that the total value of their household’s savings and investments (excluding the value of their primary home and any defined benefit plans) is less than $25,000, and nearly a third plan to retire prior to reaching age 65. Nor do they seem to be expecting a lot of support from the government; most are not confident that Social Security will continue to provide the same level of benefits as it does today (37% are not at all confident of that result), and two-thirds are not confident about the level of support from Medicare.

Nor did the process of participating in the survey seem to do anything to heighten concerns. Although the survey’s authors thought that respondents would have less confidence in their retirement preparations at the end of the survey than at the start, that was not the case. Two-thirds gave identical responses—and the others were as likely to gain confidence as they were to lose it by completing the survey.

It’s one thing to feel confident about one’s retirement prospects, of course, and another altogether to feel that way with justification. Still, nearly half (47%) of this year’s RCS respondents said that they (or their spouse) had at least tried to do a retirement needs calculation, and that’s MUCH better than the 31% who had done so in 1994. That’s an important first step, and one of the few that, IMHO, ever lead to changes in savings behavior.

The challenge, of course, is getting those participants to take the time—and run the risk of knowing that they have to undergo a change in savings behavior to avert disaster…while there’s still time to do something about it.

- Nevin E. Adams, JD

Legends for Our Times

Ours is an industry of fairly recent invention–one that is, in many respects, only just beginning to emerge from the growth pangs of adolescence. Ours is an industry constantly and dramatically evolving–and one that all too often seems relentlessly driven to push us forward to the next challenge, through the next legislative overhaul, and onto the next wave of tumult in the markets, sometimes in the same six-month period. For plan sponsors, change is not only the order of the day, it is the day. That certainly has been true for the 15 years during which PLANSPONSOR has been published.

But if the pace is relentlessly forward, there are nonetheless those among us who have a vision that stands out from the crush of the day, who provide a better way for the rest of us, either through thoughts or deeds, to succeed in helping bring about a more secure future for those who depend on us.

As our 15th anniversary approached, we began thinking about those individuals--individuals who have made an impact on this business of retirement benefits. For clarity, we limited our focus to the past 15 years, though there are certainly individuals whose contributions predate that timeframe and whose impact is still felt today. We also limited our list to 15, though it could easily have been twice that size.

They are leaders, innovators, partners—some have challenged the status quo, others have laid the foundation for a new one, and still others have helped us all negotiate the period(s) in between. There are some familiar faces, as you might expect–many have appeared in our pages over the years, several were highlighted as “influencers” in our 10th anniversary issue, and a number have subsequently been honored with PLANSPONSOR’s Lifetime Achievement Award. There also are some with which you may not be familiar, though you are almost certainly aware of their contributions. We are pleased to be able to introduce them to you here. Admittedly, there may well be those on this list that some may challenge–or some not represented who have arguably made equally significant contributions.

This is, however, our list–15 who have, in our estimation, during the passage of the past decade and a half, made a lasting contribution to the nation’s retirement security.

There are those who make a difference in our lives– parents, spouses, mentors, friends–and then there are those who make a difference in all of our lives.

They are legends.

- Nevin E. Adams, JD

The legends are online HERE